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Problem 1: Financial Statement Analysis (5 points Use the following ratio information derived from Boston Company's financial statements (these financial statements along with the definitions of the ratios noted below are in the second document provided for this exam) to answer questions (A) (F): Ratios for Boston Company Asset Turnover Ratio Capital Structure Leverage Current Ratio Days in A/c Payable Days in A/c Receivable Davs in Invento 2014 0.8 9.8 1.25 54 125 17 8.8 34.6 2013 0.8 1.28 118 17 4.5 50.4 Debt to Equity Ratio Interest Coverage Ratio Inventory Turnover Ratio Payables Turnover Ratio Profit Margin Ratio Quick Ratio Receivables Turnover Ratio Return on Assets Return on Equity (ROE) 6.7 16.7% 6.8 13.0% 1.0 2.9 10.2% 100% 3.1 13.1% 72% (A) Management at Boston Company has noticed that the company's return on equity has increased in the past year. They have hired you as a consultant, to provide detailed insight on the following questions: What factor was the primary cause of the increase in ROE? . .What was the primary factor that curtailed this increase in ROE?

Explanation / Answer

Ans 1 Increase in ROE is due to decrease in common stock equity as compared to last year from 1217 to 977 from 2013 to 2014

b) Decrease in ROE was due to decrease in sales which in turn decreased profit. Decrease in profit from $16483 (2013) to $12022 (2014)

ans 2 Decrease in sales and services is the major factor from $38066 in 2013 to $35063 in 2014 and $57665 to $55673

Ans 3 increase in Debt to Equity ratio from 4.5 in 2013 to 8.8 in 2014. The interset expenses increased from $408 to $484. There has been increase in EPS for shareholder as common stock decreased and debt has increased. So EPS increased from $15.42 to $15.62

Ans 4 Debt to Equity Ratio, Interest Coverage ratio, Current Ratio, Profit margin ratio. Debt To equity ratio used to determine how much a company relies on its debt to equity. Interest coverage ratio measures a company ability to generate adequate revenue to cover the intersest payments. Current Ratio tells how liquid the company is to pay off its creditors. And profit margin tells how profitable the coompany is. These all ratio are decent enough in 2013. so a lender can lend money.

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